>Indraprastha Gas Limited

• IGL reported sequentially lower earnings in Q3 FY12 due to higher gas cost
• Falling domestic production coupled with fully utilized import capacity mean IGL will struggle to maintain volume growth despite adequate demand
• We cut our TP from INR475 to INR366 on lower target multiple and estimates, but retain our Neutral rating given the recent correction in the stock

IGL reported a 10.5% q-o-q decline in net profit, lower than our and consensus estimates. The sequential decline in net profit to INR691m (+3% yoy and decline of 10.5% qoq) was caused by higher gas costs. Though IGL increased the price of compressed natural gas (CNG) by 5.5% on 31 December 2011, the full impact will only be evident in Q4 FY12. Gas costs increased by c16% sequentially, the majority of which was driven by rupee depreciation (-11%), with higher usage of costlier LNG contributing to the remaining balance (-5%). The company reported a gross margin of INR7.59/scm which was below its long-term average of INR7.66/scm.


■ Benefit of price increase will flow in Q3. IGL increased its CNG price in Delhi by 5.5% on 31 December, the benefit of which will be fully felt in 4Q FY12. We believe this will help restore the lost margin and we expect the company to earn INR7.92/scm margin for FY12. We expect IGL to largely maintain a similar margin in FY13 as well.


■ Volume risk to intensify. We review volume and FX assumptions. In view of falling domestic production and fully utilized import capacity, we believe IGL will struggle to maintain its historical volume CAGR of c20%. We anticipate gas sales volume to grow at just c9% in FY13 and FY14 (from 15% and 11% previously). While we have better visibility on volume growth in FY13, growth in FY14 is less obvious and will largely depend on IGL’s ability to lobby with central government to get a higher allocation of domestic gas. We continue to believe that IGL has enough cushion to keep increasing retail prices to maintain its margin. However, a recent move by the government to regulate marketing margin could impact IGL’s margin adversely. Our exchange rate assumption goes to INR50 for FY13 from INR45 previously.


■ Valuation and risk. We retain our Neutral rating but reduce our PE-based TP to INR366 from INR475 as we now value the stock at 15x FY13e EPS of INR24.4 (from 17.5x previously). The multiple reflects our lower assumed long-term growth rate of 9.5% (from 10%); 13.5% WACC and a lower ROE of 24% (from 26%). This is in line with the multiple over the last 3 months. The biggest risk to our view is the increase in the cost of gas and an inability to pass on the increased cost to consumers. A slowdown or increase in the pace of CNG vehicle additions and PNG additions could also affect our estimates.


RISH TRADER